From accounting to economics: the role of aggregate special items in gauging the state of the economy

Ahmed Abdalla and Jose M. Carabias

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose and find that aggregate special items conveys more information about future real GDP growth than aggregate earnings before special items because the former contains advance news about future economic outcomes. A two-stage rational expectations test reveals that professional forecasters fully understand the information content of aggregate earnings before special items, but underestimate that of aggregate special items when revising their GDP forecasts. Using vector autoregressions, we show that aggregate earnings before special items has predictive ability for GDP because, as suggested by previous literature, it acts as a proxy for corporate profits included in national income. In contrast, aggregate special items captures changes in the behavior of economic agents on a timely basis, which, in turn, have real effects on firms' investment and hiring, as well as consumers' wealth and spending. Consistent with news-driven business cycles, we find that aggregate special items produces synchronized movements across macroeconomic aggregates.

Keywords: aggregate earnings; aggregate special items; GDP growth; asymmetric timeliness; rational expectations; news-driven business cycles (search for similar items in EconPapers)
JEL-codes: E01 E32 E60 M41 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2022-01-01
New Economics Papers: this item is included in nep-acc, nep-cwa, nep-fdg, nep-his and nep-mac
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Published in Accounting Review, 1, January, 2022, 97(1), pp. 1 - 27. ISSN: 0001-4826

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